Cisco Stock Valuation Analysis. Will CSCO Continue to Rise? (Is CSCO a Buy, Sell or Hold in 2013?)
The ever so slight economic recovery in some parts of the world, especially in the U.S., is fueling optimism that governments and corporations will now start spending on IT infrastructure and jobs. Should that optimism prove true, Cisco Systems Inc. (NASDAQ: CSCO) will be one of the major beneficiaries. The company has a leadership position in high-end enterprise class networking and IT communications gear.
The chart above shows CSCO's share price movement over the past year, compared to two of its primary rivals in the space, Brocade Communications Systems Inc (BRCD) and Juniper Networks, Inc. (JNPR). As indicated above, all three players have seen their stocks trade in symmetry. Of late however, CSCO seems to be outperforming BRCD who, for a while, had done better than its other peers. Other competitors such as Hewlett-Packard Co (HPQ) and Alcatel-Lucent, S.A (ALU) could also pose a threat to CSCO's dominant position, however they have other lines of businesses that do not compete directly with CSCO and are therefore omitted from our analysis.
The question that shareholders are now faced with is: Can Cisco maintain its positive momentum, and should investors buy, hold or sell the stock?
Let's review some of the key fundamental and valuation data that might shed some light on that question.
- Fundamental Analysis
For its Q2-2013, CSCO produced some very strong and encouraging numbers. The company reported Net Sales of $12.5B, which was up by 5% on a year/year basis from the $11.5B reported in 2012. More impressive was the $3.1B Net income, which was a solid 44% improvement over last year. Shareholders were also pleased to see the 47.5% jump in its Earnings Per Share, up from $0.40 last year to $0.59 in the most recent quarter.
On a cumulative basis, Net Sales for fiscal 2013 came in at $24.0B which stands 5% above the $22.8B reported during the first 2 quarters of 2012. Cumulative 2013 Net Income now stands at $5.2B, which is a 30% increase over the $4.0B reported for the first 6 months of 2012.
Encouragingly for shareholders, CSCO reported Cash Flow of $3.3B, which was 6.45% higher than the same-quarter last year, but represents a staggering 32% increase on a quarter/quarter basis. And the company has been very magnanimous to its shareholders with its cash, returning back almost $1.2B of it to shareholders in Q2 in the form of $743M in dividends and $500M in share buybacks.
The company's acquisition of Cloupia, Inc. positions CSCO well to take advantage of the growing trend by government entities, banks, telecommunication companies and other multi-national corporations seeking to virtualize their IT environment. Other accretive acquisitions, such as Meraki Inc, Cariden Technologies Inc and BroadHop Inc, make it clear that CSCO is serious about dominating the oncoming Cloud-computing and "Big Data" revolution.
Investors looking for hints of what lies ahead for CSCO would be pleased to note that company management is expecting 4% to 6% revenue growth y/y in the current (Q3) quarter, and guiding to 61% to 62% Gross Margins. Should this guidance be met, one could expect additional dividend hikes as well as potential share buy-backs to occur.
- Valuation Overview
At the time of this analysis, and based on Morningstar data, CSCO is fairly valued when compared to the S&P 500 index, while based on Industry averages the stock looks significantly undervalued.
On a P/E basis, CSCO is trading at 12.5x, which is 58% cheaper than the Industry average, and 30% cheaper than the S&P 500 average. Two of its competitors, JNPR (59.2x) and BRCD (24.2x), have significantly higher valuations (are more expensive) than CSCO on a P/E basis.
While CSCO is valued almost at par with the Industry and the S&P 500 on a P/B basis, it trades significantly below the Industry on a P/Cash Flow basis, and only marginally higher than the S&P 500 on that valuation.
Given CSCO's strong fundamentals, and increasingly positive technical signals, we would conclude that the stock is trading at a fair valuation at current levels, and could even be considered slightly undervalued.
(By: Monty R. – MarketConsensus News Contributor)
Good luck in your investing,
MarketConsensus Stock Analysis Team
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